Monday, August 12, 2013

In
the last several years, we have seen more negligence claims relating to
appraisals performed for tax purposes, especially appraisals for conservation easements,
charitable deductions, and estate or gift tax.The IRS is particularly focused at this time on scrutinizing appraisals
of conservation and preservation easements submitted for the purpose of
substantiating a charitable deduction by the property owner/tax payer.Here, the property owner is generally
proposing to record an easement over his property to protect a natural aspect
or preserve historic features like a building facade.The easement typically will be donated to and
held by a charitable organization, such as a land trust or historic
preservation trust, or by a government agency.The appraisal will then be used by the property owner to claim a
charitable deduction or other tax incentive.The owner obviously will hope for a valuation that maximizes these
benefits.

Most
appraisers who perform appraisals of conservation and preservation easements
are aware of the penalties that the IRS may assess against appraisers under
Internal Revenue Code sections 6694 and 6695A for valuation misstatements.These penalties are usually addressed in the
relevant appraisal courses.Have we seen
the IRS impose penalties against appraisers? Yes.Far
worse, however, and a subject that is often not addressed by the appraisal
coursework is the prospect of a professional liability claim against the
appraiser by the taxpayer for damages.When the IRS has determined that a taxpayer has underpaid taxes based on
deficiencies with an appraiser’s valuation, the taxpayer may blame the
appraiser for the lost tax benefits and for the substantial penalties and
interest being demanded by the IRS.Have
we seen such claims? Unfortunately, yes.

Another
common tax-related appraisal claim area is the valuation of assets for gift or
estate tax.Here, the client will
probably be hoping for a low valuation that will minimize gift or estate
tax.A case filed recently in the Northwest
involves an appraiser who appraised various business assets for gift tax
purposes.The client planned to give
assets away to relatives with a value below the individual gift tax exemption
and the appraiser delivered a report valuing the assets below that threshold.The IRS determined that the appraiser greatly
understated the value.As a result, the
IRS imposed gift taxes, penalties and interest against the taxpayer totaling
several hundred thousand dollars.The
taxpayer sued the appraiser for the tax headache.

Any
appraiser venturing into tax work obviously should be well-versed in the
appropriate methodologies and specific tax agency requirements.I suggest that appraisers performing appraisals
for federal tax purposes search review the latest applicable Tax Court
decisions involving such appraisals. An appraiser
can search for tax cases at http://www.ustaxcourt.gov. Also, I would suggest that any appraisers performing
conservation easement work read the IRS’ publication “Conservation
Easement Audit Techniques Guide.”

Beyond
education, however, an appraiser performing tax-related work should give
special thought to the engagement agreement and consider ways to address the
risk of an adverse tax determination.A
well-written engagement agreement, from the appraiser’s point of view, will
advise the client that the IRS or other tax agency may disagree with or not
accept the valuation, that the appraiser cannot guarantee the outcome or be
financially responsible to the client for any taxes, penalties or interest
imposed, and that the appraiser’s liability will be limited in an appropriate
manner.The following is an example engagement
agreement provision addressing these concerns:

Client
intends to utilize Appraiser’s appraisal(s) and/or report(s) prepared under
this Agreement in connection with a tax matter.Appraiser provides no warranty, representation or prediction as to the
outcome of Client’s tax matter.Client
understands and acknowledges that the taxing authority (whether it is the
Internal Revenue Service or any other federal, state or local taxing authority)
may disagree with or reject Appraiser’s appraisal(s) and report(s) or otherwise
disagree with Client’s tax position, and further understands and acknowledges
that the taxing authority may seek to collect from Client additional taxes,
interest, penalties or fees.Client
agrees that Appraiser shall have no responsibility or liability to Client or
any other party for any such taxes, interest, penalties or fees and that Client
will not seek damages or other compensation from Appraiser relating to any
taxes, interest, penalties or fees imposed on Client or for any attorneys’
fees, costs or other expenses relating to Client’s tax matter.

Peter Christensen is an attorney who advises professionals and businesses about legal and regulatory issues concerning valuation and insurance. He also serves as general counsel to LIA Administrators & Insurance Services. He can be reached at peter@liability.com.

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About the Author

Peter Christensen is an attorney and serves as LIA's general counsel. He previously practiced law with the law firms Latham & Watkins LLP and Irell & Manella LLP. He has a B.S. with an emphasis in accounting from U.C. Berkeley and also received his law degree from U.C. Berkeley (Boalt Hall School of Law). He's been a member of the California bar since 1993. He can be reached at peter@liability.com.Please read the important notice regarding this blog at the bottom of the page. Thank you.

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